Leading indicators are indicators that are able to give a preliminary signal. This signica that the main indicator can give a signal to enter the market before potential movement. Note that even if the main indicators help you get trading signals before the start of a new stage, there is a possibility of receiving false signals. Therefore, traders often combine more than one main indicator to eliminate as many false moves as possible. Let me now show you two of the most widely advanced technical indicators used in Forex. These include the Stochastic indicator and the RSI indicator.
stochastic indicator
Stochastic indicator was created by George Lane and is one of the most popular indicators. I myself had the pleasure of studying courses George Lane Nes of the 2000s and spent about a week studying their trading methods. But this is a story for another day. In essence, the stochastic indicator is used to determine the state of overbought and oversold markets. In other words, stochastics can sometimes tell you that there overbought market and in the near future prices can be reduced for correction. If the signal is in the oversold zone, stochastics tells you that there is a resale of the currency and in the near future a bounce is possible. The stochastic indicator consists of two lines that move together and interact at some point. Further, indicator has a top and bottom. The upper zone is overbought area and the lower area is oversold. When two lines entering the bottom area, Stochastic gives a signal overbooking. In this case, we can buy a currency pair when these two lines cross at the top when they leave the oversold area. If two lines are in the upper area, stochastics tells us that the currency pair may be overbought. Then we can sell the pair when the two lines cross the overbought area. These are the two main signs that gives us the Stochastic Oscillator. However, the Stochastic is also very useful for negotiating divergence. If you carry out technical analysis with stochastic often you will notice that the indicator is rising, and the price is falling, or vice versa. This is a bullish and bearish divergence. If there is a bullish divergence between price and stochastics, we can foresee a possible price increase. The same is true, but still valid for the bearish divergence. Now let's take a closer look at the Stochastic Oscillator:
This is the H4 GRACO for EUR / USD for the period from 16 December 2015 and 20 January 2016. At the bottom of Graco, you see Stochastic indicator.
1 : The first black check shows that the stochastic is in oversold area. Stochastic rises and the price starts to rise.
2 : After that, we have an overbought signal. The decline comes right after that.
3 : A new set oversold signal the beginning of a new uptrend.
4: The next signal overbought leads to the greatest decrease in this table.
5: Stochastic descending gives a false signal overbooking.
6 : After that, we get a real oversold signal, which allows us to go a long position.
7 : The next signal is small and suggests a market overbought. The price of this reacts the same way.
8 : After getting a new sign of overbought, we get a good move down.
9 : On his way down, Stochastic gives us a false signal.
10 : And at the end we get the latest sign: oversold. And get a small upward movement.
The Relative Strength Index (RSI)
RSI is another effective leading indicator. It is similar to stochastic oscillator, which provides clues overbought and oversold and discrepancies. However, the RSI has a line entering the top and bottom area of the indicator. They are oblique overbought and oversold. When the RSI line enters the upper zone, generally above the level 70, we obtain a signal overbought. This places us in a short position in the FX pair when the RSI line leaves overbought area.
When the RSI line enters the lower region, generally below level 30, we obtain a signal overbooking. Then we can buy a couple of Forex, when the RSI line runs from the oversold area. In the RSI indicator and Stochastic divergence it is observed. Sometimes the upper and lower prices diverge in the RSI, which gives us a bullish and bearish divergence. Divergences in the bull tend to predict the potential for upward movement, while the bearish divergences point to possible downward movements.
Let's take a closer look at RSI in action:
Above, we have the H4 GRACO GBP / USD pair for the period between 1 September and 2 October 2015. At the bottom of GRACO, you will see a technical indicator: the Relative Strength Index (RSI). The image simply shows two consecutive signals for oversold and overbought market from the RSI.
After the first sign that was on the oversold area, the price starts strong, steady growth, which lasts about two weeks. Then we get a signal overbought the pair GBP / USD. RSI breaks overbought area and the price begins a sharp decline, which lasts more than two weeks.
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